Chapter 12, Problem 12.5P

a)

To determine

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Available-for-sale (AFS) securities: These are short-term or long-term investments in debt and equity securities with an intention of holding the investment for some strategic purposes like meeting liquidity needs or manage interest risk.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To Prepare: The journal entries needed to enable the investment to be reported at this amount.

Explanation of Solution

Journalize the stock transactions occurred during 2016.

Transaction on February 21, 2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
02.21.16	Investment in Corporation DT Shares		400,000
	Cash			400,000
	(To record purchase of investment in shares)

Table (1)

Transaction on March 18, 2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
03.18.16	Cash		8,000
	Investment Revenue			8,000
	(To record receipt of dividends)

Table (2)

Transaction on September 1, 2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
09.01.16	Investment in AT Bonds		900,000
	Cash			900,000
	(To record purchase of investment)

Table (3)

Transaction on October 20, 2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
10.20.16	Cash		425,000
	Investment in Corporation DT Shares			400,000
	Gain on Sale of Investments			25,000
	(To record sale of Corporation DT shares)

Table (4)

Working Notes:

Compute the gain (loss) on sale of shares.

Particulars	Amount ($)
Cash proceeds from sale	$425,000
Less: Cost of investment	(400,000)
Gain (loss) on sale of shares	$25,000

Table (5)

Transaction on November 1, 2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
11.01.16	Investment in Corporation M Shares		1,400,000
	Cash			1,400,000
	(To record purchase of investment in shares)

Table (6)

Interest accrued on AT bonds on December 31, 2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.16	Investment Revenue Receivable (1)		30,000
	Investment Revenue			30,000
	(To record accrued interest revenue)

Table (7)

Working Notes:

Calculate interest to be received on December 31, 2016.

$\begin{array}{c}\text{Interest to be received =}\left(\begin{array}{l}\text{Face amount of bonds}\times \\ \text{Stated interest rate}\times \\ \text{Time period}\left(\text{September 1 to December 31}\right)\end{array}\right)\\ \text{= \$900,000 × }\frac{10}{\text{100}}\times \frac{4}{12}\\ \text{= \$30,000}\end{array}$ (1)

Adjusting entry on December 31, 2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.16	Fair Value Adjustment		10,000
	Net Unrealized Holding Gains and     Losses–Other Comprehensive Income			10,000
	(To record adjustment of available-for-sale securities to fair market value)

Table (8)

Working Notes:

Compute the net unrealized holding gain (loss) as on December 31, 2016.

Security	Fair Value	–	Amortized Cost	=	Fair Value Adjustment
Corporation MD Shares	$1,460,000	–	$1,400,000	=	$60,000
AT Bonds	850,000	–	900,000	=	(50,000)
Total	2,300,000	–	2,310,000	=	10,000
Existing balance in fair value adjustment					(0)
Increase (decrease) needed in fair value adjustment					$10,000

Table (9)

b)

To determine

To Prepare: The income statement and balance sheet.

Explanation of Solution

Reporting on income statement:

Income Statement
Particulars	Amount
Other income (expenses):
Interest and dividend income	$38,000
Realized net gain on sale of investments	$25,000
Tax expense
Net income

Table (10)

Notes:

• Refer to requirement 1 for values of interest and dividend income, and gain on sale of investments.
• Net unrealized holding gains and losses are reported in other comprehensive income.

Reporting on statement of comprehensive income:

Statement of Comprehensive Income
Particulars	Amount
Other comprehensive income (loss) items (OCI):
Net unrealized holding gains and losses on investments	$10,000

Table (11)

Note: Refer to requirement 1 for values and computation of net unrealized holding gains and losses.

Reporting on balance sheet:

Balance Sheet
Particulars	Amount	Amount
Current assets:
Investment revenue receivable		$30,000
Securities available-for-sale	$2,300,000
Add: Fair value adjustment	10,000	2,310,000
Shareholders’ equity:
Accumulated other comprehensive income
Net unrealized holding gains and losses		10,000

Table (12)

Note: Refer to requirement 1 for values of interest income, and net unrealized holding gains and losses amounts.

c)

To determine

To Prepare: The journal entries needed to enable the investment to be reported at this amount.

Explanation of Solution

Journalize the stock transactions occurred during 2017.

Transaction on January 20, 2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
01.20.17	Cash		1,485,000
	Investment in Corporation M       Shares			1,400,000
	Gain on Sale of Investments			85,000
	(To record sale of Corporation M shares)

Table (13)

Working Notes:

Compute the gain (loss) on sale of shares.

Particulars	Amount ($)
Cash proceeds from sale	$1,485,000
Less: Cost of investment	(1,400,000)
Gain (loss) on sale of shares	$85,000

Table (14)

Transaction on March 1, 2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
03.01.17	Cash		45,000
	Investment Revenue Receivable			30,000
	Investment Revenue  (2)			15,000
	(To record interest received)

Table (15)

Working Notes:

Calculate the value of interest revenue.

$\begin{array}{c}\text{Interest revenue =}\left(\begin{array}{l}\text{Face amount of bonds}\times \\ \text{Stated interest rate}\times \\ \text{Time period}\left(\text{December 31 to March 1}\right)\end{array}\right)\\ \text{= \$900,000 × }\frac{10}{\text{100}}\times \frac{2}{12}\\ \text{= \$15,000}\end{array}$ (2)

Transaction on August 12, 2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
08.12.17	Investment in V Communication Shares		650,000
	Cash			650,000
	(To record purchase of investment in shares)

Table (16)

Transaction on September 1, 2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
09.01.17	Cash		45,000
	Investment Revenue (3)			45,000
	(To record interest received)

Table (17)

Working Notes:

Calculate the value of investment revenue.

$\begin{array}{c}\text{Intvestment revenue =}\left(\begin{array}{l}\text{Face amount of bonds}\times \text{Stated interest rate}\times \\ \text{Time period}\left(\text{March 1 to September 1}\right)\end{array}\right)\\ \text{= \$900,000 × }\frac{10}{\text{100}}\times \frac{6}{12}\\ \text{= \$45,000}\end{array}$ (3)

Interest accrued on AT bonds on December 31, 2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.21.17	Investment Revenue Receivable		30,000
	Investment Revenue (4)			30,000
	(To record accrued interest revenue)

Table (18)

Working Notes:

Calculate interest to be received on December 31, 2017.

$\begin{array}{c}\text{Interest to be received =}\left(\begin{array}{l}\text{Face amount of bonds}\times \\ \text{Stated interest rate}\times \\ \text{Time period}\left(\text{September 1 to December 31}\right)\end{array}\right)\\ \text{= \$900,000 × }\frac{10}{\text{100}}\times \frac{4}{12}\\ \text{= \$30,000}\end{array}$ (4)

Adjusting entry on December 31, 2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
31.12.17	Net Unrealized Holding Gains and Losses–Other Comprehensive Income		60,000
	Fair Value Adjustment			60,000
	(To record adjustment of available-for-sale securities to fair market value)

Table (19)

Working Notes:

Compute the net unrealized holding gain (loss) as on December 31, 2017.

Security	Fair Value	–	Amortized Cost	=	Fair Value Adjustment
V Communication Shares	$670,000	–	$650,000	=	$20,000
AT Bonds	830,000	–	900,000	=	(70,000)
Total	1,500,000	–	1,550,000	=	(50,000)
Existing balance in fair value adjustment					10,000
Increase (decrease) needed in fair value adjustment					$(60,000)

Table (20)

Note: With a positive balance of $10,000 in 2016, and to maintain a negative balance of $50,000 in 2017, a negative of $60,000 is assumed as decrease needed in fair value adjustment.

d)

To determine

To Prepare: The income statement and balance sheet.

Explanation of Solution

Reporting on income statement:

Income Statement
Particulars	Amount ($)
Other income (expenses):
Interest and dividend income	$90,000
Realized net gain on sale of investments	85,000
Tax expense
Net income

Table (21)

Notes:

• Refer to requirement 3 for values of interest and dividend income, and gain on sale of investments.
• Net unrealized holding gains and losses are reported in other comprehensive income.

Reporting on statement of comprehensive income:

Statement of Comprehensive Income
Particulars	Amount ($)
Other comprehensive income (loss) items (OCI):
Net unrealized holding gains and losses on investments	(60,000)

Table (22)

Note: Refer to requirement 3 for values and computation of net unrealized holding gains and losses.

Reporting on balance sheet:

Balance Sheet
Particulars	Amount ($)	Amount ($)
Current assets:
Investment revenue receivable		$30,000
Securities available-for-sale	$1,550,000
Add: Fair value adjustment	(50,000)	1,500,000
Shareholders’ equity:
Accumulated other comprehensive income
Net unrealized holding gains and losses		(50,000)

Table (23)

Note: Refer to requirement 3 for values of interest income, and net unrealized holding gains and losses amounts